NEWS,14.07.2012

JPMorgan Traders May Have Hidden Losses, Could Face Criminal Charges

 

JPMorgan Chase & Co said its traders may have deliberately hidden losses that have since climbed to $5.8 billion for the year, in a development that may result in criminal charges against traders at the bank.The losses came from bets on corporate debt now known as the "London Whale" trades made at JPMorgan's Chief Investment Office. Chief Executive Jamie Dimon said that in the worst-case scenario the derivatives trades would lose another $1.7 billion, and that the bank has fixed the CIO problems.Investors cheered the bank for capping losses and taking steps to ensure it avoids similar bad bets in the future. JPMorgan's shares rose nearly 6 percent on Friday.Even with the trading losses, JPMorgan earned nearly $5 billion overall in the second quarter, thanks to its strong performance in areas such as mortgage lending.The trading losses may be mostly over, but with the disclosure that traders may have lied about their losses, regulatory and legal consequences will linger for some time. Blame for the problems at the CIO office may go further up the management chain to some of the most senior executives at the firm, lawyers said.A source said that federal criminal investigators are looking at people at JPMorgan in London, where the CIO's risky bets were placed. The criminal investigation began in earnest in the past few weeks after JP Morgan's internal investigation uncovered that CIO traders may have intentionally masked losses, the source said."I see little doubt that someone is going to get charged with fraud," said Bill Singer, a lawyer at Herskovits in New York who provides legal counsel to securities industry firms, and publishes the BrokeandBroker website.Authorities ranging from the FBI to the U.S. Securities and Exchange Commission are probing the bank. The SEC could charge JPMorgan with weaknesses in oversight and internal controls, said James Cox, a securities law expert at Duke University."I think the SEC will continue to look at 'What exactly did Jamie Dimon know and when did he know it?'" Cox said.An internal review found that some of the CIO traders appear to have deliberately ignored the massive size of their trades - and the difficulty in liquidating them - when valuing their positions. The result was not reporting the full declines in the value of positions, which is forcing JPMorgan to restate its first-quarter results. The bank is cooperating with authorities.The trading losses and possible deception from traders are a black eye for Dimon, who was respected for keeping his bank consistently profitable during the financial crisis. Dimon, who has criticized regulators for meddling too much with banks, has lost credibility because of difficulties in his own house."How do we know there are not more roaches in the kitchen?" said Paul Miller, an analyst at FBR Capital Markets, referring to the maxim that seeing a single roach typically means there are far more hiding in the woodwork.The Chief Investment Office became infamous in May when JPMorgan said bad derivatives bets had triggered about $2 billion of paper losses, a figure that turned into $4.4 billion of actual losses in the second quarter.One trader in the CIO, Bruno Iksil, took big enough positions in the credit derivatives markets to earn the nickname "The London Whale." He made at least some of the big bets that caused trouble for the bank, and has since left JPMorgan, a source said on Friday.Ina Drew, who headed the CIO, has also left, and offered to give back as much of her pay as the bank was contractually entitled take back, said Dimon, whose pay could be taken back as well. A spokesman for the bank said JPMorgan had accepted Drew's offer.The bank said it had moved the bad trades from the CIO, which invests some of the company's excess funds, to its investment bank. JPMorgan was one of the inventors of credit derivatives, and its investment bank is one of the biggest traders of the product on Wall Street.The CIO will now focus on conservative investments, JPMorgan said. The bank has taken a number of other steps to prevent these types of losses from repeating, including changing the way it limits risk taking in the CIO's office."People feel good that the loss is largely contained at this point," said Nancy Bush, a banking analyst at independent research firm NAB Research.JPMorgan said later on Friday that its former CIO risk officer, Irvin Goldman, had resigned. Goldman "behaved with integrity and we wish him well," JPMorgan said.JPMorgan's shares rose $2.03 to close at $36.07 on the New York Stock Exchange.THE TEMPEST LEAVES THE TEAPOT The bank posted second-quarter net income of $4.96 billion, or $1.21 a share, compared with $5.43 billion, or $1.27 a share, a year earlier.The derivative loss after taxes reduced earnings per share by 69 cents, the company said.JPMorgan said it expected to file new, restated first-quarter results in the coming weeks, reflecting a $459 million reduction of income because of bad valuations on some of its trading positions. The bank found material problems with its financial controls during the period.The bank said its internal investigation combed through over a million emails, tens of thousands of taped conversations, and other evidence. It learned that some traders may have intended not to value their trading positions at the proper levels.In particular, the traders recorded the value of their trades at current market prices, rather than prices they would get if they liquidated their large positions, in an effort to avoid reporting their full paper losses.The bank made trades that were intended to protect it against the credit markets tanking, but allowed those positions to morph into bets on credit markets getting better.Friday's financial report came three months to the day after Dimon, 56, told stock analysts that news reports about Iksil and looming losses in London were a "tempest in a teapot."That remark, which Dimon told Congress last month was "dead wrong," added to the damage the loss has done to his reputation and his argument that his bank is not too big to be managed safely.A host of international regulators and agencies are probing the trading mishap. Besides the FBI and the SEC, they the UK's Financial Services Authority, the U.S. Federal Deposit Insurance Corp, the U.S. Commodity Futures Trading Commission, the U.S. Treasury's Office for the Comptroller of the Currency, and the Federal Reserve Bank of New York.

Libor Scandal May Hit U.S. Banks Harder Than Their British Counterparts

 

Barclays Plc and other UK banks may escape lighter than their U.S. rivals if shareholders seek damages in the wake of an interest rate-rigging scandal, because such cases are costlier and harder to win in Britain.Cases pursued in America by investors alleging they suffered a loss because of the wrongdoing of a financial institution, will often be deemed ineligible to be heard in U.S. courts when the bank in question is foreign, legal experts said.But if investors opt to take their cases to UK courts, they will find Britain's legal structures make such claims harder to win, costlier and riskier."Would we like to sue Barclays in the New York courts weknow well and we're very good at prosecuting in? Sure. But we're not going to because this is a UK situation," said Dominic Auld, a litigation expert at U.S. law firm Labaton Sucharow.Since Barclays admitted its role in manipulating the London interbank offered rate (Libor), lawyers on both sides of the Atlantic are taking calls from investors."I did take a call this morning from an institutional investor who is interested in looking at litigation both from a UK perspective and the U.S ... I expect there will be a good deal of similar interest," said Owen Watkins, a barrister in the corporate department of London law firm Lewis Silkin.More than a dozen banks are being investigated for their roles in setting Libor, including Citigroup, JPMorgan Chase & Co, Deutsche Bank, HSBC Holdings Plc , UBS and Royal Bank of Scotland..Morgan Stanley analysts have calculated the litigation risk to each of the 16 banks involved in setting Libor, an estimate of the rate at which banks could lend to each other and a benchmark for setting many other types of loans, at between $60 million to $1.1 billion. But lawyers say that while it was once commonplace for European investors to issue proceedings in the States, this transatlantic "legal tourism" was brought to an effective end in 2010 by a Supreme Court ruling in the United States.In a case brought against National Australia Bank, the court ruled U.S. securities laws do not have jurisdiction over so-called "F cubed" cases involving foreign investors and a foreign company traded on a non-U.S. market In the case of Barclays, only about 4 percent of its market capitalisation is traded in the U.S. in the form of American Depository Receipts. Any pursuit of meaningful damages from investment losses related to falls in Barclays' share price caused by the scandal will have to be carried out in Britain."Bringing proceedings here is not easy because there are various questions about causation. But most importantly Barclays would fight hard and you take a substantial risk in relation to costs that you would have to pay if you lost," said David Greene, senior partner at London-based law firm Edwin Coe.Furthermore, proceedings by institutional investors are rare and run against the traditions of the City of London financial district which had in part prompted disgruntled investors to make claims in the United States until it was halted by the F-cubed ruling."I don't think that sort of thing would be held in a UK court. I think they would just say the nature of the capital markets is shares go down as well as up. It's the guiding principle here," said one institutional investor who declined to be named because he is a major Barclays shareholder.

NEWS, 05.06.2012.

G7 action pending on Spain's debt crisis

 

Spain said today credit markets were closing to the euro zone's fourth biggest economy as finance chiefs of the Group of Seven major economies conferred on the currency bloc's worsening debt crisis but took no joint action.Treasury Minister Cristobal Montoro sent out a dramatic distress signal about the impact of his country's banking crisis on government borrowing, saying that at current rates, financial markets were effectively shut to Spain.The European Union's top economic official, Olli Rehn, said Madrid had not requested EU assistance, but German newspaper Die Welt said European officials were considering offering Spain a precautionary credit line via the bloc's rescue fund by mid-June."The risk premium says Spain doesn't have the market door open," Montoro said on Onda Cero radio. "The risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt."Spain is beset by bank debts triggered by the bursting of a real estate bubble in 2008, aggravated by overspending by its autonomous regions.The premium investors demand to hold Spanish 10-year debt rather than safe haven German bonds hit a euro era high of 548 basis points on Friday, on concerns that it will eventually be forced to seek a Greek-style bailout.A precautionary credit line would give Spain the option of trying to raise funds on its own to recapitalise its banks and tapping the European aid if it failed to raise enough.Two Spanish government sources denied earlier on Tuesday that Madrid needed or wanted such a line from the European Financial Stability Facility or the International Monetary Fund.But Montoro said Spanish banks should be recapitalised through European mechanisms, departing from the previous government line that Spain could raise the money on its own and prompting the Madrid stock market to rise.His comments on Spain's borrowing sent the euro down after the 17-nation European currency earlier hit a one-week high against the dollar on hopes that the conference call of G7 finance ministers and central bankers might hasten action.The U.S. Treasury, which chaired that meeting, said in a statement that the G7 discussed "progress towards a financial and fiscal union in Europe" and agreed to monitor developments closely. But the group made no joint statement and took no immediate action.White House economic adviser Michael Froman said the EU had done a lot to address its debt problems but clearly more action was required to reduce market anxieties."Europe has taken a number of very important steps in the last months to address the crisis," Froman told a panel at the CSIS think-tank. "It's clear now from the markets that they expect more, and more is needed."Japanese Finance Minister Jun Azumi said the G7 finance chiefs agreed to work together to deal with the problems facing Spain and Greece."I see market anxiety over world economy largely stemming from Europe's problems," Azumi told reporters in Tokyo."Bigger solution" European leaders, alarmed by the latest turn of events, have begun thinking seriously about the economic union needed to make the single currency project secure. But that end-game is months or years away."What we have learnt since the weekend is that all the talk about a bigger solution, a bigger response from the politicians is gaining some steam," said Rainer Guntermann, strategist at Commerzbank in Frankfurt. "At the same time it doesn't look like they have a quick fix at hand, not a fundamental game changer at this point in time."One senior European G7 source, speaking just before the teleconference, said it was set to turn into a "Germany-bashing session", with other partners applying severe pressure on Berlin to do more to stimulate growth and help the euro zone.The source, who requested anonymity due to the confidential nature of the call, confirmed that Germany was pushing Spain to accept international aid, as Greece, Ireland and Portugal have done, to help it recapitalise stricken banks."They don't want to. They are too proud. It's fatal hubris," the source said of the Spanish government.Berlin and the European Central Bank have so far resisted pressure from Madrid to ride to its rescue without forcing Spain into the humiliation of an internationally supervised bailout.French Foreign Minister Laurent Fabius said Europe must find a solution to the Spanish banking crisis that did not add to Madrid's already heavy budget deficit.The ECB holds its monthly rate-setting meeting on Wednesday and European Union leaders meet on June 28-29 to discuss a strategy for overcoming the crisis, which began in late 2009 when Greece revealed it had covered up a huge budget deficit.Contagion Investors have fled peripheral euro zone sovereign debt amid worries about Spain's banking crisis and fears that a June 17 Greek election could lead to Athens leaving the currency bloc, setting off a wave of contagion around the euro area.Spain will test the market on Friday by issuing up to 2 billion euros ($2.5 billion) in medium- and long-term bonds at auction.Emilio Botin, chairman of the nation's biggest bank, Banco Santander told Reuters Spanish banks needed about 40 billion euros in additional capital, adding that "there is no financial crisis in Spain".Montoro said the bank recapitalisation figures were "perfectly accessible" but analysts were perplexed about his comments on Spain's ability to raise debt.His comments appeared aimed at pressuring the ECB and EU paymaster Germany to find ways of helping. But the central bank has so far shunned calls to resume purchases of Spanish government bonds, and Berlin has rejected allowing direct aid from the euro zone's rescue fund to recapitalise Spanish banks without setting conditions for the government.The festering euro zone crisis has sparked mounting concern outside Europe. On Monday, a G7 source said fears that capital flight from Spain could escalate into a full-fledged bank run had triggered the emergency conference call.Pressure is building in particular on Germany, the biggest contributor to euro zone rescue funds, to back away from its prescription of fiscal austerity for the region's weaker economies and to work harder on fostering growth.Berlin argues it is already doing its share by encouraging generous domestic wage settlements, accepting the prospect of higher-than-usual German inflation and most recently agreeing that Spain should have more time to achieve its fiscal targets.Chancellor Angela Merkel opened the door on Monday to the prospect of a euro zone banking union in the medium term, saying she would consider the idea of putting systemically important cross-border banks under European supervision.However, Berlin is so far resisting a joint deposit guarantee for euro zone banks and a bank resolution fund, both of which would create new liabilities for German taxpayers.A German government strategy paper seen by Reuters showed Berlin does not expect final decisions on strengthening economic policy coordination until March 2013, with only a roadmap being agreed at this month's summit.The ECB could contribute by cutting its main interest rate, lowering its deposit rate to try to shake loose some 700 billion euros parked overnight in its vaults by anxious banks, or by providing a third big liquidity injection to banks. But most analysts it will await the outcome of the Greek election and the EU summit before taking decisive action.